A Stitch in Haste

You know you've succeeded as an economics teacher when you can ask the following question on a final exam with no fear of receiving nothing but blank answer sheets:

Explain why the world will never run out of oil.
People do in fact generally posit that question in terms of oil, for the obvious geopolitical reasons.

But it doesn't just apply to oil:

Copper is used in everything from automobiles to ordnance. Copper allows electricity to be generated, transported and conducted to the various outlets in a modern home. Copper is also relatively scarce compared to other metals like iron or aluminum that make up a good portion of the earth itself. So copper serves as an excellent metallic bellwether for potential future resource scarcity, according to a group of researchers who compiled data on its extraction, use, recycling and discard to estimate whether there is enough copper available to make a developed standard of living available to all the world's people. The short answer is: no.
...
[R]esidents of Canada, Mexico and the U.S. required an average of 170 kilograms of copper per person. Multiply that by overall population estimates of 10 billion people by 2100 and the world will require 1.7 billion metric tons of copper by that date — more than even the most generous estimate of available resources.

This is, of course, utter nonsense.

It's quite simple really: Yes the world supply of copper is "fixed," in the sense that there's only so much copper ore in the ground. So what? The laws of supply and demand still apply — even more so, arguably, in the context of a finite resource. If the available supply continues to decrease with demand staying fixed, then the price will merely rise over time. And as the price of copper rises, eventually the global economy will adjust accordingly (i.e., it will no longer be the case that "copper is used in everything from automobiles to ordnance").

Copper pipe too expensive for residential plumbing? Switch to plastic pipe. Copper wire too expensive for electrical wire? Switch to another conductive metal — or to fiber-optics. Unless there is a vital use of copper for which there is no substitute (not just no perfect substitute, but no substitute of any kind) would there need be any worry about depleting the finite resource.

And, of course, high prices work in both directions. A major reason that "the Bronx was burning" in the 1970s was because the only material value of the empty buildings there was the copper plumbing, which could be sold for scrap after the building was demolished. Copper is recyclable and reclaimable, so if it becomes scarce enough, then people will start looking for it — and will start finding it. (Also consider another analogy — people having their gold fillings removed when the price of that metal skyrocketed during the Great Stagflation.)

Meanwhile, with higher copper prices, perhaps new methods of extracting ore will be developed, or chemical processes that will be able to extract copper from other compounds.

The real lament behind "dwindling resources" is not that "we'll run out of copper," but rather that poor nations won't be able to afford it. That's not the same thing and does not warrant the same policy response from the developed world. "Too bad so sad" may not be the correct response, but neither is panic, or rationing, or any other market-disrupting program. Copper is a private good that is (or should be) mined by private companies from private land. That's hardly is a mandate for global interventionism.

For Discussion: I have, on the other hand, essentially argued the exact opposite regarding the world supply of gold, insisting that it would be impossible to tie, as some more radical libertarians would like, the entire global economy to the extremely limited stock of gold that is available. Am I being inconsistent? Why or why not?

Fun Fact: The word "cop" derives from the old practice of issuing copper badges to police officers. Perhaps they became too expensive...

Suggested Reading:

"Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world."
--President George W. Bush, 2006 State of the Union Address

"addiction (noun): being abnormally tolerant to and dependent on something that is psychologically or physically habit-forming"

It is, of course, impossible for America to be "addicted to oil" for a very simple reason: oil is not a consumption good, but rather a production input.

We use oil -- lots of it -- but we don't consume oil. Nobody drinks gasoline or bathes in light sweet crude.

Our demand for oil is what economists call a "derived demand." So it follows that if we are "addicted" to oil, then it must be a "derived addiction."

So what are we really addicted to?

--We are addicted to living in the suburbs (or, stated differently, to not living in cities as they existed around 1900).

--We are addicted to Orlando and Anaheim and Aspen and the Grand Canyon and all the other vacation destinations we drive to.

--We are addicted to visiting our loved ones who live on the other side of the country.

--We are addicted to educating our children, which requires big yellow buses to get them to school.

--We are addicted to not having to ride a train to cross a continent, or a ship to cross an ocean, over a span of days rather than flying over a span of hours.

--We are addicted to improving our quality life by owning stuff (which is mostly brought to us from very far away places via ship, plane and truck).

--We are addicted to not freezing to death in wintertime.

Are these addictions really so bad?

So long as prices accurately reflect costs (including any verifiable externalities), I think the answer is a resounding "no."

For Discussion: On the other hand, we are also addicted to not having nuclear reactors in our communities. Perhaps that's an addiction that requires a stint in rehab. Do yo agree? Why or why not?

Can you guess what the following graph represents?



Give up?

It's the price of sugar.

That's right -- sugar.

Why has the price of sugar skyrocketed like a dot-com stock?

Mainly because of the price of oil.

You see, when oil -- or anything else -- becomes too expensive, people begin looking for substitutes. Ethanol is a leading substitute for oil, and sugar is the primary component of ethanol. When the price of oil becomes high enough, it becomes increasingly cost-effective to use ethanol instead of fossil fuels, so refineries start buying sugar instead of oil.

Higher price of oil = higher demand for ethanol = higher demand for sugar = higher price for sugar.

or

Higher price of oil = higher demand for ethanol = lower quantity demanded of oil.

Stated differently, it's possible for oil to "price itself out of the market." In fact, it's not only possible, it's inevitable if the supply of oil is truly "fixed" (but that's a very big "if").

And this is just sugar-ethanol. Now add in corn-ethanol, natural gas, coal, nuclear and eco-friendly sources of energy, all of which become increasingly viable economically as the price of oil rises.

Now remind me again how "the world will someday run out of oil"?

Suggested Reading:

Am I the only person who gets uppity when politicians describe a free-market economic phenomenon as a "tax"?

Gasoline price increases are like a hidden tax on the working people. They're like a tax on our farmers. They're like a tax on small businesses.

So says our Oilman-in-Chief.

Um, no.

Of course, neither the global nor the American petro-economies are, strictly speaking, free markets. Point conceded. Nevertheless, the increasing prices of oil and gasoline are the result of free market forces, namely supply and demand.

Rising prices are not a "tax" anymore than a pay raise is a "welfare check." By definition the government -- and only the government -- can tax. The market -- the economy -- cannot tax anything.

It is true that the government can cause rising prices (e.g., by stifling the development of new oil refinieries) just as government can cause a tax. But somehow I suspect that this was not what our Taxman-in-Chief had in mind and that his intent was not to take credit for higher gas prices. No, Bush's message was that expensive gas isn't his fault because it isn't anybody's fault. It's "like a tax." Just like the Refiner-in-Chief's asinine State of the Union gobbledygook that we are "addicted to oil."

We're not addicted to oil. But the politicians, especially our Addict-in-Chief, are addicted to oil obfuscation. The more that the line between prices and taxes, between market forces and political forces, between the market and the state, become blurred with sloppy terminology, the easier it is to suggest that government intervention in the economy is "no big deal." If the market is "taxing" people, then the government must "anti-tax" them -- through subsidies, penalties, regulations, antitrust, price controls -- whatever the Politics of Pull feels like at the moment.

It seems that oil is a key lubricant for the gears of Leviathan.

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Howling Point reminds us that the Defender-in-Chief also called rising gas prices "a matter of national security." Which I suppose means that he has, under this Administration's "Chief-in-Chief" theory of Article II power, plenary authority over the oil industry. Stay tuned.

Via Crooks and Liars comes this piece of Malthusian gobbledygook:

One day affordable luxuries like overseas vacations and meals out will become unattainable, and even basic necessities like energy, electricity, water, and food are likely to become less plentiful and more expensive. This global austerity will produce great hardship for the poor and will force even lower-middle class families to choose between long car trips, restaurant meals, air-conditioning in summer, and high thermostats in winter.

Lying behind this historic shift in global fortunes is a fundamental reversal in the balance between resource supply and demand. For most of the 20th century, global stockpiles of vital materials like oil, natural gas, coal, and basic minerals expanded as giant multinational corporations (MNCs) poured billions of dollars into exploring every corner of the Earth in the drive to locate and exploit valuable deposits of extractible [sic] materials. This permitted consumers around the world to increase their consumption of virtually everything, safe in the knowledge that even more of these commodities would be available next year and the year after that, and so on infinitely into the future.

But this condition no longer prevails. Many of the world's most promising sources of supply have been located and exploited, and all of the additional billions spent by MNCs on exploration and discovery are producing increasingly meager results.

This is, of course, utter nonsense.

First off, there are two kinds of poor people in the world: poor people in rich countries and poor people in poor countries. The former are generally poor because either they or their parents made poor life choices. The latter are generally poor because their politicians (or, more often, their dictators) made poor central planning choices. "Exploitation" and "depletion" of resources by global capitalism (as opposed to local collectivism) have little or nothing to do with it.

Yes, production inputs such as wood, water, minerals -- and energy -- have supply and demand curves and determine, in part, retail prices for consumption goods. But if there is one thing that centuries of pre-modern, modern and post-modern capitalism have demonstrated, it's that there is rarely, very rarely, such a thing as a "fixed quantity" of an input or a scarce resource that does not have substitutes. Even land, once thought to be the ultimate "fixed input," can be increased (e.g., by a skyscraper).

The assumption that tomorrow's economic capacity will be exactly identical to today's, and that if today's inputs are depleted then the "global economic factory" will shut down, belies a fundamental ignorance of the way the world works. Factories can retool and resize, supermarkets can change their selection, homes can switch from natural gas to heating oil, and so on. "That's all folks!" is cartoon economics, not reality.

Second, and related, note that the word "technology" appears nowhere in the Alternet piece. The inability to acknowledge the consistent capacity of humanity across the centuries to:

(a) do more with less, and
(b) do different with different

has been the (non-depleting) error of such thinkers ever since Malthus.

(One quick sidebar: "increasingly meager results" -- like this?)

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If you really care -- in a central planner wannabe sense -- about America's dependence on fossil fuels generally and foreign oil specifically, then here's all you need to do:

1. Go nuclear.

2. Eliminate every single agricultural subsidy, tariff, quota, cartel and other interventionist measure (most of which, recall, make food more expensive, not less). Let a wave a bankruptcies and foreclosures come sweeping down the plain, and turn all that excess farmland into wind farms. Clean, renewable, and no cow flatulence. But if you're not willing to allow the first part, then don't bemoan the lack of the second part.

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One last digression: If you really care about what the poor and the lower middle class can and cannot afford, then perhaps you should look not at oil production rates, but tax rates. It's somewhat hard to "get ahead" when one-eighth of your paycheck is confiscated to fund a zero-return Ponzi scheme (or, to borrow a phrase, a program "safe in the knowledge that even more would be available next year and the year after that, and so on infinitely into the future").

Watch this brief video on the politics of ethanol and try to find the highly relevant, but omitted, fact that renders the narrator's entire thesis invalid:


It is indeed true that the U.S. government, in the name of "energy independence," has distorted the market for ethanol (actually it created the market for ethanol, since firms typically cannot produce it for less than the cost of gasoline). And it is indeed also true that, with artificially created ethanol demand for corn now competing with the pre-existing tortilla demand for corn, the price of corn (among other things) has risen, which in turn makes tortillas more expensive, which in turn is bad for lower-income Mexicans.

All true.

But here's what the video left out: Mexico is an oil-exporting country!

PEMEX is the largest company in Mexico and, according to the Petroleum Intelligence Weekly, in 2003 it was the ninth largest oil and gas company in the world. In the same year, it was the third largest producer of crude oil in the world.

It receives about $20 billion per year in oil revenues (more than that these days, given the increase in the price of oil). That's an awful lot of tortilla mix.

So if the Mexicans want to keep tortilla prices down, one way to do so would be to lower its price for oil and make ethanol too expensive (relatively speaking) for the U.S. government to bother with.

Which, of course, Mexico could do, since the video also left out the pesky little detail that Mexico's oil "industry" is a state-run, nationalized, socialist monopoly. If oil is so expensive that (subsidized) ethanol becomes a viable alternative, then where are all those "Exxon-like" profits that should also be accruing to Pemex (which, as part of the Mexican government, should be passing the profits on to the Mexican people, no?). And if Pemex is not making "Exxon-like" profits, then what does that say about the ability of socialist governments to actually run private enterprises — even relatively lucrative ones like oil?

And speaking of "the ability of socialist governments to actually run private enterprises" — Pemex is one of the most corruption-infested enterprises in the world — it loses $1 billion per year to corruption according to one estimate. Meanwhile, its infrastructure is collapsing: there's more to running an oil refinery than pushing the "On" button and opening the cash register. This is one of the classic flaws in socialist control of industrial production: the hubris of ignoring depreciation and the need for capital expenditure.

Pemex sucks in tens of billions of dollars — mostly American dollars — in revenue every year, and could suck in far more if it were run properly. Yet instead Pemex is a disaster, Mexico remains impoverished and the people, through the higher corn prices that Pemex itself contributes to, are actually worse off economically.

Welcome to classic Twentieth-Century industrial socialism. Which, in the Twenty-First Century, fails even faster and even worse.

Hopefully (but not likely), the people of Venezuela, Ecuador and Bolivia will take notice.

POST SCRIPT: One other error in the video — we are not "running out of oil." We can never "run out of oil." It is an economic impossibility to ever "run out of oil," or of anything else.

(Video via Boing Boing.) More on government interference in the ethanol market from Econbrowser.

George Will:

Bill Clinton, by executive edict, declared 1.7 million acres of Utah to be a national monument. Under those acres are the largest known deposit -- more than 60 billion tons -- of low-sulfur, clean-burning coal. The second largest deposit, the value of which rose because of Clinton's action locking up an alternative supply, is in Indonesia and is owned by a member of the Indonesian Riady family, of fragrant memory, which was generous to Clinton's 1992 camp.

The article generally is a review of the market distortions being imposed not only on Americans but the whole world due to our irrational, warm-fuzzy-feeling ethanol mania.

To review: Ethanol requires corn (or sugar). Impose, by government fiat, an artificially high demand for corn, and the price of corn rises by simple supply and demand -- as does every food made with corn, from breakfast cereal to the milk you put in that cereal (corn is used as cow feed) to tortillas to meatloaf (again, cattle feed).

Meanwhile, as corn prices rise, farmers: (a) seek new farmland, which means deforestation (great for combating global warming, right?), and (b) reduce their planting of other crops in order to switch to corn, raising the price of, for example, soybeans (hence more expensive soy milk) and barley (hence more expensive beer).

Incidentally, ethanol does nothing to reduce global warming. Go figure.

So, our ethanol mania -- touted by some as our single most "enlightened" public policy -- raises most food prices around the world, kills trees and does not reduce carbon emissions.

Remind me again how this is a market failure? And remind me why we should think the Clintons' lesser half is likely to be less morally defective regarding it than her pervert husband was?

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Meanwhile, for more on the Riady family's dubious history with the Clintons, see here. For those who need a refresher course on Marc Rich, see here.

I received a bizarre email today:

Interesting comments on your blog re the future of copper and that we will not run short of the material.

Can you tell me what material (hopefully affordable) is able to transmit electrical energy and if that can be done with glass fibre optic?

Just wondering; so far I haven't found a suitable alternative.

I couldn't quite tell whether this was intended as sarcasm, or was due to a language barrier, but apparently a review of the thesis is in order.

When people like me say, "the world will never run out of X," we are not saying that there is an unlimited supply of X. We are not disregarding the pesky fact that the earth has a finite volume. Or that, at any one point in time, there can only be so much of X available. Or that — in a static, closed system — if we consume some X then there will, by definition, be less X available.

We are, in short, not being metaphysically insolent.

What we are saying is that supply and demand always (in the absence of government interference) interact to produce a market-clearing price. In an unfettered market, there will always be some X to buy — if you can pay for it.

Stated differently, there is a fundamental distinction between "the world will never run out of X" and "the world will never run out of cheap X." I have certainly never said the latter, and no one I take seriously has ever said it either.

I do think it important, however, to acknowledge the frivolity of the "static, closed system" constraint. People like me who say, for example, that "the world will never run out of oil" do not say it because we blindly believe there will always be more oil to find. But neither do we blindly believe that we will never find, e.g., oil-excreting bacteria. A core Economics 101 bullet point is, recall, that higher prices catalyze the development of substitutes. This, too, is a reason why we will "never run out of X."

Rebuttals encouraged.

"We need a real world and not the world of economic theories."
--United Nations Secretary-General Ban Ki-moon

I noted, several times, the unfortunate phenomenon of rising food commodity prices — especially the "ethanol connection" — long before it was fashionable.

By "fashionable," I mean:

--United Nations bureaucrats calling the situation a "silent tsunami."

--Hugo Chavez' silly little "Mini-me," Bolivian socialist (and drug kingpin) Evo Morales, using the crisis as an excuse to demand the worldwide abolition of all capitalism (including, no doubt, the marketplace of ideas).

--Bureaucrats at the Asian Development Bank calling for an end to ethanol subsidies.

--Paul Krugman lamenting that we are "running out of planet to exploit."

--All of the above failing to connect the dots:

Just over 1 billion people live on $1 a day, the benchmark of absolute poverty; 1.5 billion live on $1 to $2 a day. Bob Zoellick, the president of the World Bank, reckons that food inflation could push at least 100m people into poverty, wiping out all the gains the poorest billion have made during almost a decade of economic growth.

The problem of course is thinking of "all the gains the poorest billion have made" solely in terms of "economic growth." But the "absolutely poor" of the world also tend to be the "absolutely oppressed" of the world — the two populations are essentially identical. Show me a hyper-poor economy, and I'll show you either a Communist dictatorship, a military junta, or a mob-installed socialist "worker's paradise" where the state has made it simply impossible for most of its people (other than state-installed crony capitalists and other politically connected elites) to do any better than "$1 to $2 a day."

When rising food prices turn "$1 to $2 a day" into "death by starvation," perhaps the problem isn't the "food prices" part but rather the "$1 to $2 a day" part. And fixing that requires fixing (i.e., scrapping) anti-democratic and anti-capitalist regimes and rhetoric.

The United States could, by itself, feed the world. Add in Europe, Canada, Australia and all the other free or mostly free Western economies that have significant (i.e., excess) agricultural capacity, and the world is simply drowning in food (has everyone forgotten the "obesity epidemic"?). The problem is not that we are "running out of food" — the problem is that we are running out of capitalism — and we need to start producing more of it. A lot more.

It's quite simple really: Give a man a fish and he's fed for a day. Stop stealing his fish and he's fed for a lifetime.

(Via Concurring Opinions. More thoughts from Reason's Matt Welch.)